accounting essay

Introducing Activity based management

Published: 23, March 2015

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Activity based management (ABM), there are some companies had started introducing this method to distinguish and evaluating activities in business performances by using the activity-based costing to present a value chain analysis, strategic change and decisions making. Activity based management was establishing a relationships between overhead and activities therefore overhead costs can be more meticulously allocated to products, services, or customer. Activity-based Management is focusing on managing activities on reducing or eliminating costs and improving customer profitability.

At other hand, activity based management was allowed the costs to be adjusted through the control of the resource-consuming. Activity based management involves some stages, including planning, activity/process, the awareness and education of all those involved and activity analysis, data collection. Eventually performance measures are including activity-based costing, performance measurement, activity classification and cost driver analysis.

Activity based management has grown largely and no longer is Activity based management's applicability limited to manufacturing organizations. The principles and philosophies of activity-based thinking apply equally to service companies, government of activity-based thinking apple equally to service companies, government agencies and process industries. The acronym itself has evolved from activity based costing to activity based cost management to activity based management, and the application of activity based management evolved from a manufacturing product costing orientation to a management philosophy of activity management applied in industries and organizations other than manufacturing.

The aiming of management developed activity based management to maximize the value adding activities while reducing or eliminating non-value adding activities. (Baker & William 2002) As a conclusion, the main purposes of activity based management is to improve efficiencies and effectiveness of an organization in securing its markets. It draws on activity based-costing as its major source of information and focuses on reducing costs, creating performance measures, improving cash flow and quality and, producing enhanced value products.

Besides that, one of benefit of activity based management is improvement responsibility of accountant. The main reasons why managers undertake ABM projects is to cut costs, or more generally, to provide support for decision making at the strategic and operational level. Using activity based information; enterprises can make informed commercial decisions such as: pricing their products and services more accurately, Identifying the most profitable groups of customers to be the focus of future customer relationship management activities, identifying how to price sales coming from e-commerce against regular business and providing detailed costing information as the basis for negotiating discounts with key accounts.

Increased competition and market globalization have significantly decreased the corporate margin of error. These days, good company planning relies on a strategic costing system to provide an accurate picture of their operational reality. The introduction of activity-based accounting has led many companies to realize that they are selling some of their products at a loss.

Activity-based costing transforms certain indirect costs into direct ones that are precisely allocated to activities. This approach provides a much more accurate picture of production costs, since overhead costs are no longer allocated arbitrarily but on the basis of cause and effect. What really distinguishes this model from so-called conventional cost models is the new management methodology. Once it starts to identify costs by activity, an organization is on its way to adopting activity based management principles. Instead of focusing on resources, activity based management bases management decisions on activities, thereby providing a completely new perspective on company operations. Rather than arbitrarily assigning resources to activities, Activity based management provides managers with the crucial ability to question the relevance of activities and hence optimize the resources allocated to them.

Activity based management's main advantage is that, by identifying company-specific performance measures, it focuses cost management activity where it will do the most good. These performance measures also improve planning techniques and the tracking of established goals.

Activity-based management is a method of identifying and evaluating activities that a business performs using activity-based costing to carry out a value chain analysis or a re-engineering initiative to improve strategic and operational decisions in an organization. Activity-based costing establishes relationships between overhead costs and activities so that overhead costs can be more precisely allocated to products, services, or customer segments. Activity-based management focuses on managing activities to reduce costs and improve customer value.

Activity based management process increasing the company performance. At other hand, some implementers having trouble when implementing, such as entering new products or markets, implementing new information systems. One respondent was stuck at the analysis stage of activity based management because of major initiative overload: besides activity based management, his company was implementing a division-wide information system, total quality management, lean manufacturing, just-in-time, balanced scorecard, and manufacturing resource planning.

Smaller companies need to be particularly creative to find reasonable activity cost drivers in their often more limited data. For example, one company in the study used cost material as a proxy for its weight. The message is to look for available drivers that have some correlation with how resources are spent.

The same study concluded that improvements to information technology often precede both activity based costing and activity based management adoption. A high level of IT sophistication appears to be an important factor in success. Companies will have an easier time implementing activity based management if their IT system has the following characteristics; good subsystem integration, user friendly query capability, available sales, cost and performance data going back 12 months, and real-time updates of all these. The activity based costing information is being used for strategic decisions because it is easily understood and "closes enough" for current needs.

Activity based management is a fundamental shift in emphasis away from traditional costing towards performance measurement. Activities consume resources, so controlling activities allows you to control costs at their source. Understanding business activities allows us to eliminate those that are unnecessary and streamline costs. This is the real value and power of activity based management; the information it brings.

Some companies introducing activity based management are disappointed with what they achieve. Besides that, they even spent a lot of money on implementing this technique, but at a result performance of the company didn't increase. This can be because they attempt the exercise at unsustainable level of detail, or do not focus on the final stage of generating improvements. Implementations often fail because the business does not take the time to identify what it is trying to achieve. For an enterprise to decide on the right approach to activity based management there are a number of issue it must consider.

There are several company developed the activity based management to control, management their company. Unfortunately, they didn't had of knowledgeable & education to apply the tools in the real life. Therefore, training is a best technique for the staff and company, so that they will gain the knowledge, experience from other after the training.

The basic technique of activity analysis can be adapted to provide a range of benefits, such as re-engineering the annual budget process, major cost reductions (10-30 per cent), customer and channel profitability, continuous performance improvement and new forms of performance measurement, such as the balanced scorecard. The accumulated benefits of such a technique should lead to a competitive advantage. And if beating the competition is your problem, adopting activity based management will certainly be to your advantage.

Applications of Activity-based management/ Activity-based management are commonly applying in the industries, and it resulting in the manufacturing and service industries especially producing product.

Like an example, activity based management & activity based costing was successfully developed in the manufacturing- Air Conditioner. AIRCO is a manufacturer air conditioner. In factory, majority of workers are working in hourly and separates to two shifts. The organization of the manufacturing process is conventional, with separate departments for purchasing, engineering, job scheduling, materials handling, shipping, accounting, and human resources. Hence, the purpose of developed an activity based costing system to assist in product profitability and customer profitability and to identify the cost of material, total overhead, labor hours.. The costs including direct/ indirect labor cost, material cost, and overhead. The next step is to identify production activities and to use resource consumption cost drivers to assign the resource costs to the activity cost pools. The activity cost pools are machines; data record maintenance; material handling; product changeover (setup); scheduling and production preparation; materials receiving and handling; product shipment; and customer service. The assignment of resources to activities typically uses resource consumption cost drivers. Instead of using cost drivers, AIRCO determined the estimated contribution of each resource to each activity based on managers' and employees' experience. (Heather Nachtmann &Mohammad Hani Al-Rifai 2004)

For example, the resource, maintenance costs, $$$$, was assigned entirely to the activity, machines. To illustrate, the cost of the machine activity was determined from the resources as follows (other activities were obtained in a similar way)

Conclusion, eventually the Manufacturer Company, or non manufacturer company wish to improve its performance and implementing Activity-based management successfully, it needs the cooperation between management, and manufacturing operation. Besides that, they also need to create management team on identifying activities processing, cost drivers, with financial and nonfinancial information. The production process and identifying cost drivers require careful efforts. Efforts to redesign cost systems usually are rewarded when organizations have high product diversity, various cost drivers, multiple distribution channels, and heterogeneous batch sizes.

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